Welcome to the John Hall and Company Selling Land in Alabama series. This is part three in the series. Go here to read, part one written by Pete Hall, and part two written by Hoke Smith.
Owning a piece of land for many has always been part of the American dream. It can provide a getaway back to the country for hunting, fishing, horseback/ATV riding, gardening, farming and building family memories. Due to these memories and activities, many landowners will often “bake” these great times into the value of their land when it comes time to sell. This mistake can result in an overpriced listing that can be difficult to sell. An accurate estimate of value of your land is very important whether you are a buyer or a seller. Therefore, the question that is often asked “What is my land worth?
The first thing to remember when estimating a value of your land is that value is only an opinion and that opinion is only as good as the amount of market data and the detail of data available. A contract is a fact, a listing is fact and a closed sale is a fact and those are some of the data points utilized to arrive at an opinion of value. The market uses the term “comp” for comparable sale or listing. The key is to make sure the data is truly comparable.
Land is often difficult to value due to the lack of availability of sales and listings data. Unlike residential houses, where 80% of all sales are typically input in a multiple listing service (MLS) and the data is readily available, land transactions are not usually included in the MLS. Much of the sales data is scattered amongst many land brokers and consultants and is difficult and time consuming to collect.
So, let’s move to the basics of what is my land worth. The first important step is to accurately assess all of the important economic and physical attributes of your property. I am often asked “What is land going for around here?” That is when I ask…What type of property is it? Crop land, pastureland, wooded land, timberland, cutover land or turnkey recreational land, etc. These different types of land carry different values. My other question would be; “Where is it located? What do the surrounding properties look like? You get the picture. Not all rural land is the same.
Once the owner’s property type and description has been assessed it is time to move on to gather sales and listings of similar property. Sales of similar property should follow this definition of “market value” set by US Federal government for financial Institutions.
A definition of “market value” is below:
The most probable price which property should bring in a competitive an open market under all conditions requisite to a fare sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undo stimulus. Implicit in this definition is the consummation of a sale as of a specified date and passing title from seller to buyer whereby:
- The buyer and seller are typically motivated;
- both parties are well informed or well advised and each acting in what he or she considers his or her own best interest;
- a reasonable time is allowed for exposure to the open market
- payment is made in terms of cash or US dollars or in terms of financial arrangements comparable thereto
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
What this means is when looking for comparable sales in order to arrive at an opinion of value is that the sale should be normal.
A land sale in which a seller is forced to sell due to a court order or a bank foreclosure or where the adjoining property owner paid a premium because it was next to them is typically not a comparable sale.
A land sale that brings a premium sale price due to the owner offering below market financing (say 0%) is not typically a good comparable sale.
A land sale that was not exposed to the open market and the seller accepted the first offer they received is typically not a comparable sale.
A sale where one of the parties to the transaction was uninformed, such as a party did not know the true timber value or did not know the property was contaminated or had a WRP easement attached to it is not typically a good comparable sale either.
Although most sellers would appreciate it if the adjoining landowner would pay a premium, this is not typically the case and is rare.
Once a sale has been identified for comparability to your land it is then important to research the transactional and property characteristics and compare them to your property.
Transactional adjustments include:
Property rights conveyed: Do all rights go with sale, mineral, surface, timber, etc?
Financing terms: were terms normal or favorable due to owner financing?
Conditions of sale: Normal sale or not. Maybe the buyer paid a premium because they were on the back side of a 1031 exchange or maybe the sale was to a family member for a discount.
Expenditures made immediately after purchase: Did the purchaser pay a commission, or did purchaser have to buy access or clear a title problem after the purchase?
Market conditions (change in value over time). If the sale is a year or two old has the market changed?
All of the above have to be known, considered and adjusted for as it compares to your property.
Property adjustments include differences in:
Location: Area or neighborhood differences and proximity to major cities or major interstates.
Physical characteristics: access, topography, interior road system, flood zones/ wetlands, size, shape of site, improvements on the property.
Economic characteristics: CRP rent, timber leases, hunting leases, surface or mineral royalties or amount of timber.
Non-realty components of value: Land transactions often include personal items such as tractors, ATV’s, trailers or furnishings to name a few.
It is vitally important to understand each sale used as a comparison to your property to draw a credible conclusion in understanding what your property is worth. The more sales and listings available the more credible the opinion. Also, having the sales data is the first step to know what your property is worth but accurately analyzing the data is equally important. A business analyst once told me “just because you have the recipe, doesn’t make you a good cook.”
Remember, market changes are not linear. It goes up and down and is like a wave in which there are troughs and crests within the rise and fall of overall land market movement. If your property is listed at the same time many similar properties like yours are listed, it could a trough moment where the supply exceeds demand and vice versa, a crest moment where demand exceeds supply if yours is one of the few listed properties for sale at the time. So, the number of listings also needs to be reviewed in light of the comparable sales.
Over the years I have seen many investments in land not optimized due to the seller not wanting to pay a knowledgeable broker or consultant prior to selling their land. I have seen this in other industries as well and have personally not paid for advice when I should have. My advice is to keep your day job and do what you do well and have a professional broker, appraiser or consultant help you with pricing your land and exposing it to the market in order to maximize what you receive for it.
– Josh Hall, MAI
Click here for part four of this series, written by Robert Smith, “What Does it Cost to Sell Land in Alabama?”
Click here for part five of this series, written by John. E Hall, Jr, “Preparing Your Land To Sell to a Recreational Buyer”